Annex 2A Partial correlations

120 C H A P T E R 2 G L O B A L P R O D U C T I V I T Y

policies, including measures that promote macroeconomic stability and enhance the rule of law. Productivity growth also benefits from expertise in producing relatively complex and sophisticated exports, linked to international technology diffusion. The effects of some of these drivers may have changed over time. Innovation and experience with economic complexity seem to have increased in importance. So have demographic factors, notably changes in population age structures. Despite remarkable improvements over the last 60 years in key human capital indicators, such as the provision of primary education and infant mortality rates, many gaps between EMDEs and advanced economies remain. Moreover, since the GFC, many drivers of productivity growth have faltered, including those that had previously supported strong productivity growth. Some of these adverse trends are likely to be amplified and reinforced by the global effects of the COVID-19 pandemic. The recent slowdown in productivity growth has multiple sources, and action on a range of fronts will be needed. Governments seeking to raise productivity growth can increase public investment and stimulate private investment; improve human capital; foster firm productivity, partly by promoting on-the-job training and upgrading management capabilities; increase the exposure of firms to international trade and foreign investment; enable the reallocation of resources toward more productive sectors; and seek to diversify production. The benefits of many productivity-friendly measures could often be enhanced by improving the macroeconomic and institutional environment. Future research. Examining the effectiveness and the optimal design of policy measures attempting to boost labor productivity in different countries would be fruitful. In particular, analysis of the relative importance of specific aspects of the institutional environment that are conducive to productivity growth is needed. It is also critical to identify alternative sources of productivity growth capable of offsetting the fading impact of traditional drivers such as demographics, education, and global value chains. In light of the likely damage that COVID-19 is inflicting on long-term growth, implementing the appropriate structural reforms is critical, especially for EMDEs that are aiming to catch up with advanced economies. e next chapter focuses on the impact of unexpected adverse events and examines them in detail.

Many drivers discussed in this chapter, such as patents per capita, are strongly correlated with the initial productivity level. The effect of initial productivity should be allowed for before analyzing the relationship between drivers and productivity growth. To remove the linear effect of the initial productivity level, consider the following equations:

dyi = β0 + β1 y0,i + ey,i ,

xi = α0 + α1 y0,i + ex,I ,